How to sell down a concentrated stock position

How much of one stock should you keep?

My suggestion is to keep only as much of your employer’s stock as you’d buy today if your vested shares had been paid to you in cash.

I think about it that way because RSUs are taxed as wages when they vest, so selling a new vest costs you almost nothing extra in tax. If your company had paid you that money as a cash bonus, would you have used all of it to buy the company’s stock? Probably not, and holding the shares is the same decision.

It’s also worth adding up everything you already have riding on your employer. Your salary, your bonus, and all of your unvested stock depend on the company doing well, and if your partner works there too, so does their pay.

As a rough guide, I get uncomfortable when one stock is more than about 10% of someone’s investments. If you’re above that and the honest reason is that you never got around to selling, or you didn’t want to pay the tax, I’d start selling.

I should be clear about the downside. If the stock keeps going up, you’ll have sold shares that would’ve been worth more, and that doesn’t feel good. Diversifying doesn’t guarantee you’ll do better or protect you from losses. What it does is make sure one company having a bad few years can’t derail your plans.

Which shares to sell first

I’d usually sell the shares with the highest cost basis first. Two lots of the same stock that are worth the same today can come with very different tax bills.

If you don’t tell your broker which shares to sell, they’ll sell your oldest ones first, and those usually have the biggest gains. You can choose specific lots when you place the trade, and it’s worth keeping the confirmation.

It’s also worth looking at how long you’ve held each lot. Gains on shares held for more than a year are taxed at a lower rate, so sometimes it’s better to sell a slightly larger long-term gain than a smaller short-term one. And if you’re planning to give to charity, hold onto your oldest, lowest-cost shares, because those are the best ones to donate. Donating company stock to charity covers how.

What I wouldn’t do is hold onto a position you think is too big just to avoid the tax. Say you have $200,000 of stock that was worth $80,000 when it vested. Selling all of it would cost about $28,600 in federal tax at a 23.8% rate. A 15% drop in the stock would cost you $30,000, which is more than the tax, and you’d still owe tax on the rest when you eventually sold.

Using losses to offset gains

If you sell other investments at a loss, those losses offset your gains on the stock you’re selling down. Losses you’ve carried forward from earlier years count too.

I’d start with investments you’d be fine replacing with something similar, so you still end up with a portfolio you’re happy with.

There are a couple of limits. Once your losses have offset all of your gains, you can only deduct $3,000 a year of what’s left against other income like your salary ($1,500 if you’re married filing separately), and the rest carries forward to future years. It’s also worth knowing that harvesting mostly delays tax. The investment you buy as a replacement has a lower cost basis, so it has a bigger gain when you eventually sell it.

Wash sales when your RSUs keep vesting

If you sell your company’s stock at a loss and get more of it within 30 days before or after, you can’t claim the loss. An RSU vest counts as getting more shares.

That matters a lot if your RSUs vest every month or every quarter, because a sale at a loss will often fall within 30 days of a vest. The loss is disallowed for as many shares as vested. Reinvested dividends, your spouse’s purchases, and purchases in your other accounts count as well.

The loss isn’t gone forever if the new shares are in a taxable account, because it gets added to their cost basis. But if the new shares are bought in an IRA or Roth IRA, you lose it for good. If someone else manages your investments, make sure they know your vesting schedule.

Is direct indexing worth it?

It can be, if you have a large position with big gains that you’re trying to sell down over time. If you’re investing new cash, a regular index fund will do nearly the same job for less.

With direct indexing, you own the individual stocks in an index instead of a fund. That means your manager can leave out your employer’s stock so you’re not adding to what you already own, and they can sell individual stocks that are down to create losses that offset your gains.

How much you’ll save is hard to predict, because it depends on what the market does. It also costs more than an index fund, and your returns won’t match the index exactly.

If an advisor suggests it, I’d ask them to show you how it compares with a simple fund portfolio after fees and taxes. I’d also ask how they’ll coordinate with your stock plan, your spouse’s accounts, and your company’s trading windows.

How this works at your company

The rules above are the same wherever you work. These guides cover what’s specific to each company.